Educational Articles

Dow-30 Earnings: United Technologies – Fourth Quarter 2013

Erik M. Manning
| January 22, 2014

UnitedTechnologies (UTX – Free United Technologies Stock Report) , an industrial conglomerate that makes everything from elevators to jet engines, and a Dow-30 component, has announced results for its December quarter and full-year 2013. Revenues missed both our and Wall Street's estimates, as end markets were slower to rebound than most had expected, and the company's ongoing restructuring hindered growth somewhat. Conversely, the bottom line rose past even the most aggressive calculations due to successful cost-cutting procedures that pushed margins higher. Not surprisingly, investors applauded the earnings beat and bid these shares up slightly in morning trading.

The top line came in at $16.759 billion, up from the $16.443 billion posted in the year-earlier period, but roughly $400 million shy of our $17.163 billion estimate. Organic growth actually perked up in the fourth quarter; however divestitures made over the year had a negative impact on comparisons. For the full year, revenues summed to $62.6 billion, well up from the $57.7 billion posted in 2012. A good portion of this stems from the sizable Goodrich acquisition, which has made UTX a larger player in the aerospace field. Moreover, new orders were stout as last year drew to a close; Otis, which makes elevators and escalators, saw an 8% uptick in equipment orders versus the year-earlier period, and large commercial spare engine parts orders rose 20% at Pratt & Whitney, an engine maker that caters to commercial and military concerns.

From a bottom-line perspective, investors had even more to be enthused about. Share earnings registered $1.58, $0.07 better than the consensus call. That brought the annual figure to $6.22, a 14% year-over-year jump, and a noticeable return to yearly profit growth after a slip in 2012. Adjusted for restructuring costs and one-time items, earnings were up nearly 30% from last year's mark. CEO Louis Chenevert cited two reasons for the incline on the company's call; swifter integration of the acquisitions made of late and a relentless focus on trimming costs wherever possible. One caveat in the term, the company did not ship eight helicopters under a Canadian contract that was expected to pinch the bottom line. This boosted the showing because the choppers are sold at a loss. A delay has been agreed upon between the two entities, but we still see this being a drag for some period, now in all probability during 2014.

We cannot shine enough of a spotlight on how wise the Goodrich purchase is turning out to be in light of decreased spending on the military front. UTX is now much more involved in aerospace and competing with powerhouses in that field like Boeing (BA – Free Boeing Stock Report). All the while, budget constraints are curtailing military spending. Adding Goodrich to the fold transformed the company at a most opportune time, and more of the benefits of this pact will be on display this year.

With that, guidance for 2014 was reiterated from what management had hinted at last month. Subscribers should note that management historically has set the bar low and hurdled it, especially with regard to the bottom line, so keep that in mind as 2014 progresses. For now, we are looking for revenues to approximate $64 billion, roughly $1.5 billion lower than our earlier call. As stated, orders are coming in at a handsome clip and global opportunities are bountiful, so we see that figure gravitating north in the coming months. Still, our share-net expectation remains at $6.85. That metric represents a 10% annual advance. Additional synergies from Goodrich can still be squeezed out and finances are strong if management chooses to take some stock off the table to prop up share results.

Speaking to finances, UTX plans to spend about $2 billion on capital expenditures in 2014. Too, $1 billion each has been earmarked for M&A activity and share repurchases. The former is in line with the 2013 amount, but buybacks were low last year, in the neighborhood of just $150 million. Barring unforeseen circumstances, we do not think a program will be enacted to that extent, especially when factoring in that the shares are currently sitting near an all-time high – they, in fact, reached a peak just after the earnings release This is often not an ideal time to aggressively buy back stock.

We think investors have a number of angles to play with this blue chip. Yes, the recent quotation sits above $116, but that still only equates to a P/E ratio of just under 17.0, using 2014's expectations as a baseline. With that, we still think there is some room to run for UTX stock. Too, its dividend was recently upped to $0.589 per quarter, meaning its yield is more just over 2% and a bit ahead of the Value Line median. With our Highest marks for both Safety (1) and Financial Strength (A++) and an elevated level of Earnings Predictability (90 out of 100), we view this Dow component as a solid play for long-term-oriented portfolios.